KMG EP reported about the approval by the Board of Directors of the budget for 2018 and the business plan for 2018-2022, while the Company's Independent Directors abstained from voting on these issues.
In the approved budget in comparison with 2017, the price of oil was raised from $45/barrel to $55/barrel and the rate of tenge was adjusted from the previous T360/1 $ to T340/1 $. The company expects positive free cash flow due to the continued positive effect of the processing scheme, even taking into account the increase in capital investments. Capital investments in 2018 are planned at a rate of T142bn, which is 4% higher than planned capital investments in 2017. Capital investments for the period 2019-2022 are planned at about T118bn.
Planned production in 2018 is 5.6 mn tonnes from OMG and 2.9mn tonnes from EMG. The total planned production volume in 2018 from OMG and EMG is 8.5mn tonnes, a 2% decrease on the approved production plan in 2017 mainly due to a reduction in the base production level at OMG in 2017.
The Company’s share in the planned production of Kazgermunai (KGM), CCEL and PetroKazakhstan Inc. (PKI) in 2018 is 3.4mn tonnes, 5% less than the approved production plan in 2017 due to an anticipated natural decline in production at PKI and KGM.
By 2022 the Company plans annual oil production volumes at OMG and EMG to increase to 6.2mn tonnes and 3.0mn tonnes, respectively, 6% higher than approved production plan in 2017. This increase in production is a result of the comprehensive measures with existing well stock and additional geological and technical measures. Meanwhile, production from KGM, CCEL and PKI is planned to be 1.9 mn tonnes by 2022, 46% lower than the the approved production plan in 2017, due to the natural decline of production at KGM and PKI by 64% and 66% respectively.
In general, the planned production volume of KMG EP taking into account the shares in KGM, CCEL and PKI in 2022 planned at the level of 11.1 mn tons, which is 9% below the approved production plan in 2017and 7% below the projected volume in 2018.
The planned production volume coincides with our forecasts in 2018, while the price of oil laid by the Company in the budget ($ 55/barrel) is slightly behind the expected $ 57/bbl. At the same time, in our opinion, the Company is overly optimistic in assessing the further increase in production at OMG and EMG in 2022.
As we expected, deliveries to the domestic market in 2018 will increase to 36% (our forecast is 37%). Probably, KMG EP takes into account the risk of abolishing independent oil processing, noting that these expectations of the Company can be adjusted taking into account the changes in the situation on the domestic market of fuels and lubricants in Kazakhstan.
The company also met expectations for an increase in Capex to T142bn. A higher yield of light oil products and higher refining rates after the completion of refinery upgrades are also taken into account in our model.
The budget for 2018 does not bring changes to our valuation, which is why we view the news as neutral for the value of the shares.